Quite without warning, the Reserve Bank of India (RBI) notified the framework for issuance of rupee denominated bonds under the overall external commercial borrowing (ECB) framework on 29 September. Unlike other surprises from the RBI, this was a pleasant one, particularly because the framework’s provisions were more liberal than its draft form, which had left much to be desired.
The issuance of the framework follows the submission of a report to the Ministry of Finance by the Committee to Review the Framework of Access to Domestic and Overseas Capital Markets, in February this year. The report included a recommendation that the market for local currency denominated bonds should be encouraged as it provides an alternative source of debt financing for private and public sector borrowers which does not expose them to currency fluctuation risk. By reducing currency mismatches and lengthening the duration of debt, such bonds could also augment financial stability. To encourage the development of the Indian bond market, the committee also recommended the removal of quantitative restrictions on foreign investment in the Indian bond market.
In view of the interest of investors in subscribing to rupee denominated bonds issued by the International Finance Corporation, the RBI, in its bi-monthly monetary policy statement of 7 April, said it intended allow Indian bodies corporate to raise ECBs through rupee denominated bonds. It then released the draft framework for issue of rupee denominated bonds on 9 June for public comments.
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Sawant Singh is a partner and Aditya Bhargava is a principal associate in the Mumbai office. Phoenix Legal is a full-service law firm with offices in New Delhi, Mumbai and Chennai.
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